Tuesday, July 15, 2014

In Front of Yellen-The Bund is Wound Tight and Could Snap

Over the last 5 years, the bund has never traded a 5 session period where the sum of the open to close levels has been as modest as now.  Using current prices for a today’s settle, the Bund has never had as small the current absolute sum of 22 tics differentiating the open and closing levels for the last 5 sessions combined.  In fact, there has only been 4 instances where the absolute difference between the open and close over a 5 session period has been even twice as much (44 tics). 

This is to say that the bund is wound tightly and there is a high level of indecision.  Should that indecision be resolved, there should be a strong move in one direction or another.  Generally speaking, volatility has been cited a being low across asset classes, from equities to fixed income and commodities to metals.  The bund has not escaped this and possibly is exemplifying. 

Both the growth in the States and the lack thereof in the Euro-zone have conspired to separate the yields of the German Bund and the U.S. 10yr Treasury to levels not seen since 1999.  Today there is little expectation for Chair Yellen to make any comments that will ‘rock the boat’.  However, she has recognized in recent outings the prospect for damage from extensive risk-taking and low implied volatility. 

With a chance to soften a message of warning against risk assumption, the Fed Chair might choose to make comment today that could find sellers in both U.S. fixed income and across the pond.  While foreign buyers of Treasuries have been a strong support for lower yields here, the spread between the Bund and Treasuries has been its driver.  If the Bunds give ground, sparked possibly by rhetoric from Yellen or other events, the foreign buying support may subside and rates could move markedly higher. 

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